Author: Peter Napp

Why Automating and Optimizing Collateral and Liquidity Matters in Volatile Markets

Posted on by Peter Napp

As evolving tariff policies in the U.S. have impacted global markets, the pressure on financial institutions to maintain collateral compliance and operational resiliency intensifies. Rapid market movements can cause sudden spikes in margin calls, counterparty exposure, and regulatory scrutiny. To navigate these challenges effectively, firms must ensure that their collateral processes are not only accurate and efficient but also resilient — capable of responding in real time to shifting conditions. This is where automation becomes mandatory.

How Automation Enhances Liquidity and Collateral Optimization

Collateral compliance refers to the ability of an institution to meet regulatory, contractual, and operational requirements for collateral usage and reporting. In fast-moving markets, manual processes can lead to delays and errors while increasing the risk of non-compliance and financial penalties. Automation minimizes these risks by streamlining processes such as collateral eligibility checks, margin management, settlement, and reporting. It ensures consistency, accuracy, and transparency — key components for meeting internal governance and regulatory standards.

During these dramatic market conditions, optimizing collateral becomes essential for financial institutions to maintain liquidity, reduce costs, and manage risk effectively. Volatile markets often lead to sharp changes in asset values and increased margin calls, placing significant pressure on a firm’s collateral resources. Without a strategic approach for liquidity management, institutions can scramble to meet obligations, potentially using more expensive or illiquid assets than necessary.

Operational resiliency, on the other hand, is about maintaining business continuity and performance despite stress or disruption. Volatile markets test the limits of legacy systems and fragmented infrastructures. Automation enhances resiliency by enabling faster decision-making, reducing reliance on manual interventions, and allowing institutions to respond instantly to market triggers. Automated workflows help institutions quickly allocate optimal collateral, manage substitutions, and avoid settlement failures, even during high-volume periods. Moreover, it can better align the deployment of collateral to maximize value and deliver realized savings during dramatically shifting markets.

Furthermore, automated collateral optimization and booking systems offer real-time visibility into enterprise-wide inventory, allowing for smarter, data-driven decisions. They can detect inefficiencies, suggest optimal allocations, and simulate “what-if” scenarios—capabilities that are crucial when market conditions are unpredictable.

Making Collateral Management an Advantage with Automation

Ultimately, automation transforms collateral management from a reactive, manual process into a proactive, strategic function. It empowers institutions to stay compliant, agile, and operationally sound during times of market stress — reducing risk, enhancing efficiency, and preserving confidence in an increasingly complex financial environment.

Transcend’s collateral optimization platform helps its clients perform through all market conditions. To schedule a demo or learn more about Transcend’s collateral optimization or other innovative products for enhancing liquidity, funding, and collateral performance, click here or contact us at sales@transcendstreet.com

Global Systemically Important Bank Selects Transcend for CCP Integration

Posted on by Peter Napp

A Global Systemically Important Financial Institution (G-SIFI) faced the formidable task of monitoring and managing margin exposures and collateral pledges across a global network of CCPs on behalf of their house and client businesses. And if this could be accomplished, how could they optimize their collateral to fuel additional savings opportunities? Transcend’s industry-leading technology enabled the integration of collateral and margin exposures across 50 CCPs, while reinforcing commitments for operational efficiencies and financial optimization.

The Challenge: Harmonizing a Global CCP Network

By utilizing both direct clearing and local brokers, the institution encountered growing operational complexity. The demand for a seamless, integrated solution to unify and optimize CCP-related activities became essential. The primary challenges included:

Complexity: Navigate CCP operational challenges as each CCP works as a silo with unique connectivity and data sharing access, requiring time and internal resources to aggregate various data flows. Moreover, this needed to be done across 50 CCPs globally.

Margin Requirements: Develop efficient tracking and management of margin calls across multiple CCPs without relying on internal resources to develop and maintain multiple integrations.

Funding Efficiency: The ability to source financial savings by optimizing collateral postings across your CCP exposures.

Liquidity Monitoring: The need to use CCP data to ensure adequate funding is consistently maintained across numerous Nostro bank accounts to satisfy calls throughout the day.

Operational and Reporting Integration: Deliver efficiencies by enhancing transparency and automation for internal teams responsible for reporting and reconciliation.

Develop Efficiencies: Centralize eligibility, positions, and margin obligation data in a centralized platform. Automate the allocation of optimal collateral postings for cleared margin requirements through powerful analytics, optimization, and STP.

The Solution: Transcend’s End-to-End CCP Integration

Following a comprehensive evaluation, Transcend was selected as the only end-to-end solution capable of harmonizing CCP activity while also delivering real financial results. Transcend’s platform provided a fully integrated approach by combining its CCP Central, Eligibility, Optimization, and Intraday Nostro monitoring solutions. This selection was driven by several key capabilities:

Seamless CCP Integration: Transcend’s CCP Central solution provides a unified view of margin requirements and collateral positions across 50 CCPs, ensuring a more efficient and transparent clearing process.

Collateral Optimization: The Optimization module enables real-time decision-making, ensuring that the most cost-effective collateral is posted, thereby reducing excess liquidity drain and optimizing financial resources.

Eligibility and Allocation Automation: Transcend’s Eligibility engine streamlines collateral selection and allocation, ensuring compliance with CCP requirements while maximizing efficiency.

Intraday Nostro Monitoring: By linking cash postings to nostro activity, Transcend provides real-time visibility into cash movements, enabling proactive liquidity management and reducing funding costs.

As financial institutions continue to navigate the complexities of global clearing, Transcend’s comprehensive suite of solutions positions itself as the premier choice for optimizing CCP operations. This partnership underscores the critical role of technology in driving financial efficiencies and operational resilience in an increasingly interconnected global market.

To learn more about Transcend’s CCP Central or to request a demo, click here.

 

Paul Wilson Joins Transcend to Expand EMEA Business

Posted on by Peter Napp

March 5, 2025, Greater New York Area: Transcend, a leading provider of liquidity, funding, and collateral optimisation solutions, has appointed Paul Wilson as Director of EMEA Sales. In this role, Paul will focus on expanding Transcend’s global footprint, particularly expanding the Company’s physical presence in Europe and penetrating the Middle Eastern, African and Asian markets.

“Transcend has seen incredible growth over the recent years and is focused on accelerating this momentum in the EMEA region,” said BJ Marcoullier, Global Head of Sales & Business Development at Transcend. “Adding high-caliber, industry-savvy professionals like Paul will help us build on this momentum and deliver our industry-leading capabilities to new and existing clients.”

Mr. Wilson brings more than 20 years of sales, pre-sales and product expertise to Transcend. Most recently, he served as sales director, EMEA for Broadridge, focusing on Securities Finance, Collateral Management products.  Prior to joining Broadridge, Paul held positions at  ION, Sharegain, and 4Sight Financial Software. “As we accelerate our impact in Europe and make inroads into Asia, I look forward to being a part of Transcend’s continued evolution as a critical enterprise solution for collateralised businesses,” explained Wilson. “I’ve lost count of the number of times I’ve been asked for a solution for optimization over the last 2 decades. Clearly, Transcend is leading the way in this space, and I am excited to join the global sales team and play my part in driving growth and client engagement.

“Transcend is leading the industry in providing innovative optimisation solutions across triparty agents, CCPs and internal activities and our clients are realizing millions of dollars in real savings. Paul’s extensive experience in the securities finance industry and the EMEA region will be a great asset for Transcend as we increase our ambitions in the region,” said Bimal Kadikar, Founder and CEO of Transcend.

Over the past year, Transcend has increased its on-the-ground presence in London to better serve their growing client base amongst G-SIBs, regional banks, brokers, asset managers and insurers. Paul will play a pivotal role in driving Transcend’s sales and business development efforts, within the EMEA region as the Firm looks to add many more European-based clients.

ABOUT TRANSCEND

Transcend is a financial technology company with a mission to improve efficiencies in capital markets through advanced technology. Our unparalleled and innovative modular technology helps clients achieve next-level performance through collateral, funding, liquidity & capital optimization solutions. With seamless connectivity to the world’s leading triparty agents, central counterparties (CCPs), custodians, and nostros, Transcend is the partner of choice for inventory analytics, optimization, and automation within a business line or across an enterprise.

Transcend has a growing roster of top-tier financial institutions including GSIB banks, broker-dealers, asset managers, and insurance companies. Visit transcendstreet.com to learn more about how Transcend addresses an array of complex financial, operational, and regulatory concerns.

Collateral Optimization

Posted on by Peter Napp

What is Collateral Optimization?

Collateral optimization in capital markets refers to the strategic and efficient use of collateral to minimize costs, maximize liquidity, and meet regulatory and risk management requirements. It involves selecting, allocating, and managing collateral in a way that maximizes the best use of available resources while minimizing the financial impact on the organization.

In today’s capital markets ecosystems, efficient collateral management is essential for sustaining market stability, especially with tightening regulatory demands and increasing global trade volumes.

Key Components of Collateral Optimization

Collateral Allocation: Allocating the most cost-effective assets as collateral, ensuring that high-quality, low-cost assets are used for transactions that demand them, while reserving more expensive or scarce assets for critical needs.

Eligibility Criteria: Ensuring that the collateral meets specific requirements set by counterparties or regulatory bodies, such as asset type, credit rating, and liquidity standards.

Cost Management: Reducing the cost of holding and posting collateral by optimizing the allocation of assets across multiple obligations, and by minimizing the need to post higher-margin or higher-value assets.

Liquidity Optimization: Balancing the use of collateral assets in a way that maintains liquidity, ensuring that collateralized assets can still be converted to cash or other liquid assets when needed. Intraday liquidity is an important aspect of liquidity optimization. It ensures that capital market participants can access enough daily liquidity to carry out activities like buying and selling securities, settling trades, or covering short-term financing needs.

Substitution Strategies: Efficiently managing the substitution of collateral by identifying lower-cost alternatives that meet transaction requirements without compromising on quality or eligibility.

Collateral Reuse: Leveraging rehypothecation or reusing collateral across multiple trades where allowed, to enhance the efficiency of collateral use and reduce the overall need for collateral assets.

Regulatory Compliance: Ensuring adherence to regulatory standards, such as those set by Basel III, EMIR, and Dodd-Frank, which impose collateral requirements and impact how assets are optimized for margin and capital management.

Importance of Collateral Optimization in Capital Markets:

  • Cost Efficiency: By optimizing the selection and allocation of collateral, firms can lower the cost of holding and posting assets, freeing up high-quality collateral for more critical uses.
  • Liquidity Preservation: Optimizing collateral ensures that firms maintain sufficient liquidity while meeting collateral obligations, which is especially crucial during periods of market stress.
  • Regulatory Adherence: Proper collateral optimization ensures compliance with regulatory requirements for margin and capital, reducing the risk of penalties and maintaining operational soundness.
  • Risk Management: By strategically managing collateral, firms can better mitigate counterparty risk and ensure that the collateral posted is suitable for the risk profile of the transaction.
  • Operational Efficiency: Automating and optimizing collateral processes improves operational efficiency, reducing the time and effort required to manage collateral allocations and adjustments.

In an increasingly complex financial landscape, collateral optimization is a strategic deliverable for organizations to improve operational efficiency, maximize costs saving opportunities, and ensuring regulatory compliance, all while maintaining the liquidity needed to support business operations and manage risk.

Ready to Reach The Next Level Of Performance Results With Smarter Collateral Optimization?

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Collateral Eligibility

Posted on by Peter Napp

What is Collateral Eligibility?

Collateral eligibility in capital markets refers to the criteria that determine whether an asset can be accepted as collateral in financial transactions such as derivatives trading, securities lending, and repurchase agreements (repos). These criteria are defined by counterparties, clearinghouses, or regulatory authorities to ensure that the collateral meets the necessary standards for credit quality, liquidity, and legal enforceability.

Key Components of Collateral Eligibility

Asset Type: Eligible collateral typically includes highly liquid and creditworthy assets such as government bonds, cash, and certain types of securities. Each transaction may have specific requirements regarding the type of assets that can be posted.

Credit Quality: Collateral must meet specific credit rating thresholds to be considered eligible. Higher-rated assets are generally preferred, as they are less likely to lose value during market fluctuations or credit events.

Liquidity: The asset’s ability to be quickly and easily converted into cash is a critical factor. Eligible collateral must be liquid enough to be sold or used without significant delay or loss in value.

Jurisdictional and Legal Requirements: The collateral must be enforceable under relevant legal frameworks. This includes ensuring that the asset can be legally transferred and seized in the event of default and that it complies with the laws of the jurisdiction where the transaction occurs.

Concentration Limits: There are often limits on how much of a certain type of collateral can be accepted, preventing over-concentration in a single asset type or issuer to avoid excessive exposure to specific risks.

Haircuts: Even eligible collateral is often subject to a “haircut,” which is a percentage reduction in its value to account for potential volatility or liquidity risks. The size of the haircut depends on the asset type, market conditions, and credit quality.

Regulatory Compliance: Eligible collateral must also meet the standards set by financial regulations, such as those outlined in Basel III, EMIR, and Dodd-Frank. These rules impose specific requirements on the types and amounts of collateral that must be posted in various transactions.

Importance of Collateral Eligibility in Capital Markets Ecosystems:

  • Risk Mitigation: Ensuring that only high-quality and liquid assets are used as collateral reduces counterparty risk by providing security that can be easily liquidated if needed.
  • Liquidity Management: Maintaining a pool of eligible collateral helps firms meet margin and funding requirements without straining their liquidity positions.
  • Regulatory Compliance: Using eligible collateral is essential to meet regulatory requirements, helping firms avoid penalties and ensure compliance with margin and capital rules.
  • Operational Efficiency: Clearly defined eligibility criteria streamline collateral management by reducing the need for frequent reassessment of assets, leading to smoother settlement and risk management processes.
  • Credit Protection: By restricting collateral to high-quality, liquid assets, firms protect themselves from potential losses in the event of a counterparty default, ensuring the collateral holds its value over time.

Challenges in Managing Collateral Eligibility:

  • Market Volatility: Rapid changes in market conditions can cause previously eligible assets to lose value or liquidity, affecting their suitability as collateral.
  • Dynamic Requirements: Regulatory changes or shifting risk appetites may result in evolving eligibility criteria, requiring firms to stay agile in managing their collateral pools.
  • Cross-Jurisdictional Complexities: Firms that operate across multiple jurisdictions may face challenges in meeting varying legal and regulatory standards for collateral eligibility.

Managing collateral eligibility is essential for safeguarding transactions, ensuring regulatory compliance, and maintaining operational and financial stability.

Ready to More Seamlessly Analyze and Mobilize Collateral?

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Collateral Management

Posted on by Peter Napp

What is Collateral Management?

Collateral management is an intricate part of the capital markets and involves the administration and oversight of financial assets, such as securities, that are pledged to mitigate counterparty risk in transactions like derivatives trading, securities lending, and repurchase agreements (repos).

As one of the participants in the capital markets, creditors often require collateral — such as securities, cash, or other assets — that meet specific eligibility criteria to mitigate the credit risk associated with transactions like commercial loans or mortgages. In the event of borrower default, the creditor can seize the pledged collateral to recover the owed amount. Collateral management refers to the process through which counterparties, such as the creditor and borrower, exchange and oversee these assets.

How does Collateral Management Work?

“Collateral eligibility” determines whether a particular asset qualifies to be pledged as security for a loan. An eligible asset must meet the lender’s requirements based on factors such as asset type, the issuer’s creditworthiness, and market value. Only assets deemed acceptable can be used as collateral, ensuring they can be liquidated to recover losses in case of default.

The concept of collateral is straightforward: counterparties — including banks, insurance companies, broker-dealers, pension funds, hedge funds, large corporations, or asset managers — use eligible collateral to secure credit exposure. Cash and government bonds are often favored due to their high liquidity and reliability, making them a common choice in collateral arrangements.

In securities lending, a fund temporarily loans out securities it owns to an approved borrower in exchange for a fee. To mitigate the risk of non-return, the borrower must provide sufficient collateral — either in cash or other securities — designed to protect the fund if the loaned securities are not returned within the agreed timeframe. However, this arrangement is not without risks, including counterparty and liquidity risks. Similarly, repurchase agreements (repos) represent another form of collateralized lending, where a basket of securities serves as the underlying collateral for the loan. Legal ownership of these securities transfers from the seller to the buyer during the contract and reverts to the original owner upon completion.

The Evolution of Collateral Management

Collateral management, while not a new concept, was traditionally seen as a back-office and middle-office function. However, the global financial crisis of 2008 shifted this perception. Financial institutions recognized the critical role of collateral in ensuring access to essential liquidity and funding, especially during periods of market volatility. This realization, coupled with the implementation of new regulatory measures aimed at strengthening the financial system’s resilience, brought collateral management to the forefront as a vital front-office priority.

Who Uses Collateral Management?

Collateral management is essential for businesses across financial and credit markets to mitigate risks and optimize resources. Key industries include banks, insurance companies, broker-dealers, and asset managers, which use collateral in loans, securities financing, and derivatives trading. Hedge funds, pension funds, and corporations rely on collateral for leverage, risk management, and asset-backed financing. independent clearinghouses and central counterparties (CCPs) require collateral for margin requirements, while energy traders and private equity firms use it in trading and project financing. Additionally, corporate treasuries and regulatory entities manage collateral to meet liquidity needs and ensure compliance with financial regulations.

 

Key Elements of Collateral Management:

Collateral Selection: Choosing suitable assets—such as cash, government bonds, or equities—that can be used as collateral, based on their credit quality and liquidity.

Valuation: Ongoing assessment of the collateral’s market value to ensure it maintains adequate coverage. Regular mark-to-market valuation is critical, as asset values fluctuate over time.

Margin Calls: If the value of the collateral falls below a predetermined level (often referred to as a “haircut” or margin), the collateral receiver may issue a margin call. The counterparty is then required to provide additional collateral to cover the shortfall.

Substitution: In certain situations, one type of collateral may be replaced with another, pending mutual agreement. The new collateral must meet the acceptable standards of both parties in terms of value and quality.

Eligibility Criteria: Defines the standards that determine which assets can be accepted as collateral, based on factors such as asset type, creditworthiness of the issuer, market value, liquidity, and regulatory requirements, ensuring the collateral meets the lender’s risk management and operational needs.

Collateral Rehypothecation: This refers to the reuse of received collateral in other transactions. Rehypothecation is common in repos and securities lending, but it is subject to regulatory and contractual limitations.

Settlement and Reconciliation: Ensuring that collateral is transferred to the correct accounts and that both parties maintain consistent records of transactions, helping to avoid discrepancies or errors.

Importance of Collateral Management in Capital Markets:

  • Risk Reduction: It lowers counterparty risk by providing security that can be liquidated in case of a default.
  • Liquidity Provision: Collateral acts as a source of liquidity, particularly during financial stress.
  • Regulatory Compliance: Enhanced regulations post-2008, such as Basel III, EMIR, and Dodd-Frank, emphasize efficient collateral management to meet margin and capital requirements.
  • Operational Efficiency: Automating collateral management processes helps reduce operational risks, errors, and settlement delays.

Ready to Streamline Your Collateral Management?

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Transcend Expands its Platform Offerings to Nomura, a Key Client

Posted on by Peter Napp

January 30, 2025, Greater New York Area: Transcend is partnering with Nomura, one of the world’s leading financial services firms, to implement Cash and Collateral Management modules that are built on Transcend’s pioneering technology. By harmonizing key operational systems and data in one platform, Nomura aims to position itself to better manage and optimize its collateral, funding, and liquidity across its Global Markets business.

Transcend and Nomura first partnered in 2019 to improve collateral operations and eligibility validation processes for bilateral derivatives. The partnership has since expanded to include optimized collateral allocations with multiple triparty agents. The Transcend platform enables users to make collateral allocation decisions using a variety of factors including haircut, asset quality, and funding maturity, among others. Following these successful engagements, Nomura made a strategic investment in Transcend in 2023.

The relationship is now further expanding to include inventory management, sources & uses, and intraday liquidity monitoring capabilities.

“We are delighted to expand our relationship with Nomura,” said Bimal Kadikar, CEO and Founder of Transcend. “With the implementation of an array of new services across business areas, we are realizing the vision of a single, unified platform for optimizing collateral, funding & liquidity across the firm.”

“Optimizing collateral and financial resources is a competitive advantage in today’s global financial economy,” said Anthony Kowalski, Chief Operating Officer of Global Rates at Nomura. “With Transcend, we have delivered value along each step of the way and are really excited about where we are headed.”

Transcend has experienced significant client growth over the last several years. Leveraging its industry-leading collateral optimization platform, businesses from asset managers to insurers to regional banks to sell-side broker-dealers are benefiting from financial resource savings, better risk management, and operational efficiency. Transcend looks forward to continued expansion of its product and company footprint in the years to come.

About Transcend

Transcend is a financial technology company with a mission to improve efficiencies in capital markets through advanced technology. Our unparalleled and innovative modular technology helps clients achieve next-level performance through collateral, funding, liquidity & capital optimization solutions. With seamless connectivity to the world’s leading triparty agents, central counterparties (CCPs), custodians, and nostros, Transcend is the partner of choice for inventory analytics, optimization, and automation within a business line or across an enterprise.

Transcend has a growing roster of top-tier financial institutions including GSIB banks, broker-dealers, asset managers, and insurance companies. Visit transcendstreet.com to learn more about how Transcend addresses an array of complex financial, operational, and regulatory concerns.

About Nomura

Nomura is a global financial services group with an integrated network spanning approximately 30 countries and regions. By connecting markets East & West, Nomura services the needs of individuals, institutions, corporates and governments through its three business divisions: Wealth Management, Investment Management, and Wholesale (Global Markets and Investment Banking). Founded in 1925, the firm is built on a tradition of disciplined entrepreneurship, serving clients with creative solutions and considered thought leadership. For further information about Nomura, visit www.nomura.com.

Euroclear & Transcend Team Up for Joint Collateral Service!

Posted on by Peter Napp

Brussels, 13 November 2024. Euroclear enters a partnership with Transcend with the aim to introduce a new joint collateral optimization service. The service will bring together Euroclear’s industry-leading collateral management infrastructure and data with Transcend’s best-in-class optimization platform to address clients’ collateral optimization needs.

The collaboration is announced just before the 2024 Collateral Conference, Euroclear’s premier event for the collateral management community. The new service is expected to launch in Q1 of 2025.

Transcend is a leading technology company providing solutions including inventory management, collateral eligibility and optimization. These innovative solutions help global market participants achieve better financial and operational performance by automating complex liquidity, funding, and inventory decision making. Transcend’s optimization platform leverages data from dealers, triparty agents, securities depositories, and other sources to allow for holistic optimization across collateral venues and straight through processing of allocations and movements.

Available through existing Euroclear connectivity, the new service will easily integrate critical data for smart decision making and settle optimized collateral allocations. By leveraging Transcend’s technology, clients will be able to configure optimization scenarios, include external collateral pools to determine the best collateral use at Euroclear and perform “what-if” analyses on specific constraints.

Olivier Grimonpont, Head of Product Management, Market Liquidity at Euroclear, commented: “New regulatory requirements have made collateral optimization a priority for dealers. This new service brings to the market the combined expertise of Euroclear and Transcend. Euroclear’s long-standing collateral management experience and robust infrastructure combined with Transcend’s best-in-class optimization and booking technology offers an unparalleled solution to meet our clients’ needs for collateral optimization.”

“We are excited to partner with Euroclear in offering our industry leading optimization service to Euroclear’s clients to seamlessly optimize their collateral, liquidity, and funding decisions. Transcend’s technology is already used by the world’s largest financial institutions and this joint service enables a quick way for Euroclear customers to seamlessly take advantage of our sophisticated platform and capabilities,” Bimal Kadikar, Transcend’s founder and CEO.

About Euroclear
Euroclear group is the financial industry’s trusted provider of post trade services. Guided by its purpose, Euroclear innovates to bring safety, efficiency and connections to financial markets for sustainable economic growth. Euroclear provides settlement and custody of domestic and cross-border securities for bonds, equities and derivatives and investment funds. As a proven, resilient capital market infrastructure, Euroclear is committed to delivering risk-mitigation, automation and efficiency at scale for its global client franchise. The Euroclear group comprises Euroclear Bank, the International CSD, as well as Euroclear Belgium, Euroclear Finland, Euroclear France, Euroclear Nederland, Euroclear Sweden, Euroclear UK & International.

About Transcend
Transcend is a financial technology company with a mission to improve efficiencies in the capital markets through advanced technology. Our unparalleled and innovative modular technology helps clients achieve next-level performance through collateral, funding, liquidity & capital optimization solutions. With seamless connectivity to the world’s leading triparty agents, central counterparties (CCPs), custodians, and nostros, Transcend is the partner of choice for inventory analytics, optimization, and automation within a business line or across an enterprise. Transcend has a growing roster of top-tier financial institutions including GSIB banks, broker-dealers, custodians, asset managers, and insurance companies.

Bridge to the Future: The Practicality of Integrating DLT-based Securities with Legacy Collateral Infrastructure

Posted on by Peter Napp

It is widely believed that crypto technology design and implementation efforts to date have laid sufficient groundwork for the broader utilization of tokenized securities in the very near future. However, it is not clear how firms will integrate this evolutionary product with their legacy infrastructure. The choice between maintaining a current technology stack and investing in new distributed ledger technology (DLT) is not mutually exclusive. Financial institutions should be preparing for a future where both traditional and DLT systems work in concert. For collateral, balance sheet, and financing transactions, the new DLT world presents distinct opportunities while “business as usual” technology and protocols will continue to serve a valuable function for many years to come.

All regulated banks, insurance companies, and asset managers operate on critical infrastructure, little of which is DLT-compatible. But trying to retrofit an older system to transact in real-time with a DLT platform may not be feasible.

As more DLT services are introduced, firms could be forced to manage two fully different sets of technology, cost structures, and data formats. While many highly efficient processes have existed for 30 or more years, there is a strategic way to integrate the stack without duplicating work efforts for current technology and again for a DLT world. This complexity should be avoided from the outset of introducing any new technology.

DLT is Ready for a Securities Ecosystem

The securities industry has seen what the crypto markets can do with DLT for trading and post-trade processing. DLT’s power of atomic, instantaneous settlement of crypto has impressed banks and investors: the operational, capital, and funding benefits are without dispute. Smart contracts and crypto exchanges operating with minimal or no oversight are used daily. Crypto markets have proven that DLT technology works and have taken multiple products, services, and even language from the securities industry to replicate their trading and post-trade environment.

As crypto has grown, DLT is gaining mindshare at major financial institutions both conceptually and for implementation. There are growing securities networks for cross-platform DLT operability. For example, HQLAX, which provides Digital Collateral Registries to digitize assets, recently announced that it had passed a milestone of €1 billion notional in outstanding agency securities lending Delivery vs Delivery (DvD) transactions. In May 2024, DTCC, Clearstream, and Euroclear published a position paper with six principles “to promote the successful adoption of tokenization and digital asset securities (excluding cryptocurrencies). It also details a comprehensive set of risk management controls to underpin the future of digital markets.” Already, the industry is talking about how hard a move to real-time T+0 settlement could be in the future without DLT.

Firms will need an operations and technology strategy that makes sense to move into production at scale. There is no expected mandate from regulators on the horizon, which means the industry must coordinate to deliver to the greatest number of participants with a vested interest in market efficiency. Market infrastructures and vendors in DLT will supply the nodes, but each bank and investment firm must be prepared to accept, use and revert back the new massive inflow of data.

How Much Value Can DLT Provide for Balance Sheets and Collateral Management?

To assess how important it may be to accommodate DLT in a current technology environment, we first ask how much DLT could impact balance sheet and collateral management. Already, trading platforms are announcing advancements, especially in providing intraday liquidity in FX swaps and repo. The promise of near instantaneous settlement for securities where payments are exchanged immediately after a trade is compelling for operational efficiency and counterparty risk, as well as significant reduction in the balance sheet for settlement exposure accounting. These are good reasons to move forward in the direction of DLT.

In the collateralized business world (repos, securities borrow/loan, cleared and uncleared derivatives), the benefits can be quite large if tokenized securities can address the major industry challenge of moving collateral across venues (triparty agents to central clearing counterparties (CCPs) to bilateral) easily, leveraging the economic benefits of assets without worrying about operational complexities. These benefits have been touted by crypto platforms but the securities industry is moving to a more practical approach of focusing on targeted problem areas – which may yield positive results in relatively shorter timeframes.

Practically Integrating DLT with Current Architecture

The DLT-based tokenized securities evolution is happening – albeit quite slowly right now. This means that firms have some time to prepare for adoption, but it is paramount to understand that this evolution will mean the current world and infrastructure will be more complex than the current state. A comprehensive platform integration strategy is a key requirement for firms working through the challenges of fusing DLT with their existing workflows. While many large firms have already embarked on the journey to develop and connect to DLT platforms, a requirement to seamlessly interface with existing platforms presents a new twist that must be considered in the speed and frequency of data movements. There is also a need to consider metadata – the data that describes the data – in these transactions to ensure that posted collateral meets eligibility requirements and is appropriate to regulatory capital thresholds. This is a complex task even before DLT.

Mandatory clearing of US Treasury repo and increasing interest in intraday repo trading present a unique dimension to industry challenges with DLT. Dealers are already trading billions in intraday repo volumes (mostly on DLT) to manage their balance sheets. For US Treasury repo, there will be activity that settles through traditional venues, outright or repo trading that may be cleared at one or more CCPs, and intraday repos trading on DLTs. Managing these settlement platforms is a daunting task for most firms; they will need capabilities that provide a holistic view across all the activities in real-time for internal purposes as well as regulatory reporting.

The only realistic solution is using an integration technology like Transcend that can connect with a diversity of CCPs, bilateral counterparties, triparty agents, internal technology platforms, and DLT that can effectively work across various venues and support traditional settlement methods, but can also fit with prevailing DLT platforms to support the entire ecosystem (see Exhibit 1). Standards like the Common Domain Model sound good on paper to solve these sorts of problems but the industry is not ready for that big a changeover. Proprietary and diverse data formats will be the norm for years to come.

Some critical capabilities that firms must develop are:

  • A comprehensive and real-time view of assets regardless of the location or “form” (traditional or digital) in their inventory management views.
  • The ability to perform all business, treasury, and operational analytics on sources and uses of collateral regardless of the location and form.
  • Optimizing decision-making in such a way that the economic benefits of one asset vs. the other are evaluated along with the operational constraints of different forms of the asset. For example, an IBM or Vodafone bond at DTC or Euroclear or on a chain will have the same economic considerations but will have very different operational constraints that must be integrated into optimization decision-making.
  • Tackling the additional complexity of booking automations to make sure that the overall platform is capable of moving traditional assets and digital assets in a seamless manner.

A move to DLT for the securities industry presents multiple positive opportunities. However, the reality of data integration, connecting with internal systems, and moving an organization to the speed of almost instantaneous settlement is not trivial. There is a need to build a bridge to the future to ensure that both legacy and DLT platforms and interfaces are working efficiently: this is the work ahead. While firms still have time to sort through their options, starting now to plan for the inevitability of DLT at some level in several years is a good idea for market participants at all levels.

Originally published on Finadium.com, September 5, 2024.

CCP Optimization and Automation: Q&A with Bimal Kadikar, Transcend CEO

Posted on by Peter Napp

Transcend’s CCP Central has revolutionized target state optimization of cash and collateral pools across a global network of CCPs. With an industry-leading 30-plus CCPs globally, Transcend continues aggressively expanding its coverage and capabilities to support its clients. Bimal Kadikar, Transcend’s founder and CEO, shared some thoughts on the CCP Central platform.

Can you provide an overview of Transcend’s CCP Central, and what the solution does?

CCP Central is all about creating a single portal connecting a disparate ecosystem of CCP data. Every CCP operates in its own way, with unique rules, requirements, and nuances. This lack of standardization across CCPs has made it difficult for firms to efficiently manage and scale their CCP-facing collateralization processes. As the market leader in collateral optimization, it was important for Transcend to incorporate CCPs in our technology framework to offer a truly holistic solution.

CCP Central provides our clients with real-time visibility across CCP relationships and thoughtfully operationalizes margin processes.

Can you walk through a use case of how a firm could benefit from CCP Central?

The main benefit of CCP Central is to get a single portal to manage and optimize all margin obligations in real-time in an optimal manner and achieve operational efficiencies by STP of collateral movement.   Transcend solution allows firms to get a harmonized view of the world across CCPs while maximizing economic and operational efficiencies. Optimizing collateral is not easy to achieve with CCPs as the methodologies can vary widely. For example, Options Clearing Corporation (OCC). OCC is a challenge because, unlike other CCPs who publish haircuts by securities that apply to all members, they accept securities under their “Collateral as Margin” procedure. This means that they charge each member a variable-bespoke haircut per security based on its interplay with the members’ trading positions: the “Portfolio Specific Haircut” or PSH of each security.

So, adding Apple shares as collateral may reduce the overall portfolio exposure, whereas adding NVDA shares could increase exposure within a firm’s trading portfolio at the OCC. Consequently, the OCC would give the firm more collateral value for Apple than if the firm posted the NVDA. At another member, the situation could be reversed, and NVDA shares would be more optimal than Apple shares to pledge as collateral.

It becomes critical for firms to figure out which security to post based on the dynamic margin method. Now, think about this complexity multiplied across all CCPs; it becomes a daunting challenge for most firms without an automated and target state-driven solution.

Because Transcend connects CCP datasets and analyzes all reference data and constraints, our technology can seamlessly identify what is the best security to post to get the best value across all obligations.

What trends have you seen in the industry that have impacted the evolution of Transcend’s CCP Central?

Traditionally, CCPs have been one of the most critical players in the derivatives markets, and they continue to rapidly grow in importance.  They consume valuable capital, funding, and liquidity. And consequently, our clients in their drive to be maximally efficient invest heavily in how to reduce financial and operational costs via holistic collateral optimization.

Typically, because most firms manage complex CCP requirements manually, they must keep to simple collateralization routines focused on meeting critical requirements in a timely fashion. However, in doing so, they incur an opportunity cost by missing out on smarter combinations of assets that are achievable with better tools.

At Transcend, we are flipping that concept around. Our technology first identifies the most economically efficient collateral allocations and then carries out the operational processes required to instruct the movements and achieve full STP automation where possible.

In our view, we lead our industry with global connectivity and have onboarded over 20 CCPs, adding additional CCPs every quarter. We continue to build our CCP relationships to ensure that our platform’s capabilities are strategically aligned with our client’s optimization goals.

How does CCP fit into Transcend’s solution suite of collateral, funding, and liquidity products?

The Transcend solution suite is a cohesive, fully integrated yet modular platform. We have built each of our products thoughtfully and organically, integrating each module into a systematic architecture that can either solve very specific challenges or work together as an end-to-end enterprise solution. These modules span Eligibility, Inventory, Margin, Optimization, and Booking Service.

CCP Central is an extension of our existing offering and allows clients to choose to either streamline CCP funding optimization on its own or to fold cleared derivatives CCP funding into a broader firmwide collateral strategy.

What makes CCP Central different from other solutions, whether built internally or developed by third parties?

As far as I know, no clearing member or software provider has been able to build the holistic solution that Transcend offers, especially within the context of enterprise-level optimization. While many have spent years tactically developing parts of a digitized data framework, they have not been able to connect all aspects from eligibility, margin requirements, substitution opportunities, and optimization along with other demands and achieving full STP with the CCP as well as internal processes.

The truth is that it is difficult and costly to build and maintain such wide connectivity. Transcend’s out-of-the-box solution is an affordable and scalable solution that allows firms to minimize development, hosting, and maintenance costs while reaping the benefits of a thoughtfully built solution that has evolved over the last seven years.

We’ve already overcome the challenges of comprehensive optimization by developing and implementing Transcend at top-tier banks, broker-dealers, and custodians. Why recreate the wheel or only solve part of the puzzle when Transcend can solve your firm’s greatest technological challenges in a very short timeframe?

Learn more about Transcend’s CCP Central solution and request a demo.

 

This updated content initially appeared in PR Newswire, May 19th, 2021.

Intraday Cash & Collateral Management

Posted on by Peter Napp

Almost on queue, every 7-10 years a period of stress in the banking sector reminds us of what Warren Buffet once said, “it’s only when the tide goes out that you learn who’s been swimming naked.” And now following the mini-crisis of 2024, “intraday” is the operative word du jour one hears at conferences, planning meetings, and at watercoolers.

During these times of stress, firms learn firsthand how well their liquidity planning, stress tests, and technology capabilities perform. After the recent stress in the regional bank market with the failure of Silicon Valley Bank, Signature Bank, and First Republic Bank along with liquidity issues at New York Community Bank, Treasurers, Funding teams and Operations leaders have renewed focus in two key areas (among others):

Intraday. In the current context – how effectively can a firm measure, analyze, and manage its intraday collateral and cash?

Monetization. Do firms have the capability to understand how much collateral they have? Do they know where it can be utilized? And do they have the means to fund it on demand in the market? Said another way – how valuable is their collateral when they really need it?

The Bank of International Settlements has long outlined key requirements for intraday liquidity management under BCBS 248 which provides guidelines on these critical capabilities. And with the recent liquidity issues surfacing within the banking industry, these capabilities have again become a focal point.

BCBS 248’s guidance provides the baseline for effectively managing intraday liquidity, but after the recent turmoil, firms are increasingly focused on whether collateral and funding sources can be appropriately monetized during periods of stress. This monetization can take many forms and key capabilities include the following:

  • Ensuring the firm can evaluate whether its collateral is eligible across funding sources and collateral agreements including central banks, FHLB, CCPs, and financing contracts.
  • “What if” analysis using optimization analytics to evaluate if its collateral pools are sufficient to raise needed funding from available secured funding sources.
  • Ensuring end-to-end solutions to mobilize collateral across these venues and operationally support funding processes.

Transcend has been at the forefront of providing collateral & liquidity management solutions to increase the efficiency, automation, and resiliency of a firm’s collateral and funding processes. Transcend’s key solutions Include:

Eligibility Central: Digitize, harmonize, and analyze eligibility schedules spread across CCP, triparty, derivatives, and bi-lateral securities finance systems to evaluate asset eligibility across these agreements.

Inventory Management: A holistic look into the attribute-rich composition, sources, and utilization of your global assets.

Intraday Liquidity Management: Harmonize cash and securities balances across depos, nostros, and internal accounts. Comprehensively analyze intraday account activities and accurately forecast cash or security balances to make smarter decisions.

Optimization: Connect eligibility, inventory supply, and collateral obligation data spread across internal and external systems to identify optimal funding and liquidity decisions spanning collateral types and business lines.

To learn more about any of these industry-leading capabilities, click here to get in touch with the Transcend team.

Understanding the Complexity of the Margin & Collateral Processing Space, and How Transcend Can Help

Posted on by Peter Napp

Over the last 20 years as more markets have become eligible or mandated for clearing, efficient margin & collateral processing has become a critical business function. The most recent example includes the upcoming mandated clearing of treasuries and treasury repo instruments.

This migration to cleared markets has created a complex margin and collateral ecosystem for firms to support that can include  both house and client activity, direct access to a global network of CCPs, or the use of FCMs.

To efficiently access these markets requires visibility into a variety of CCP functions. However, this is not easily accomplished. Infrastructure, integration methods, and data taxonomies differ across these venues making it difficult for firms to organize and manage their operations.

Transcend provides transparent access to this margin and collateral ecosystem through its CCP Central Solution by harmonizing:

  • Collateral Eligibility Evaluation
  • Margin Call Activity and excess/deficits
  • Collateral Allocation

Transcend’s CCP Central solution natively integrates with its Optimization solution and Booking Service to select the best collateral to pledge to meet a margin call and automate that collateral movement — helping support critical operational processes and create a financial lift through smarter collateral decisions. Transcend’s single portal access into your CCP network creates important resiliency by directly accessing CCP margin and collateral activity alongside of the existing settlement infrastructure.